The IRS has instructed same-sex couples that are DP'd, CU'd, or married in community property states (Washington, California, Nevada), to start income-splitting, i.e. averaging the incomes while filing separately. The Sacramento Bee reports that this will increase some people's tax burden and lower others', but only provides and example of the latter:
In an example cited by Lambda officials, a hypothetical couple where "David" is an attorney earning $225,000 and "Richard" a librarian with $20,000 in income, will see a combined savings of $6,824 in taxes.
It's an interesting example that represents a small part of the American population (read: Lambda Legal's donors and associates). Couples with large disparities in incomes are the couples that benefit the most, which makes sense considering how income-splitting was created in 1948 when women were expected to stay home while men earned the income. It's a subsidy to help keep women out of the workforce.
One way to look at it is a tax incentive that encourages people to not work; another way is as a tax shelter for someone's higher income. In order to keep half of one person's income out of higher tax brackets and puts it in lower brackets. Of course, like every tax break, it must be funded by the rest of us with overall increased tax rates or cuts in spending, so it's an effective transfer of wealth. It's nice that same-sex couples in three states can now access that tax break, but maybe, in 2011, the tax break should just be eliminated.
As for how much partners who earn about the same amount of income will have to pay, I'm not sure and I'm not finding any answers. I'm guessing the domestic partners who file will still be filing as single people, not "Married Filing Separately," which means that they can still apply for the Earned Income Tax Credit, right? The Sacramento Bee doesn't say, although it does say that "for others, they'll pay more in taxes" as a result of the new rules.
But the Bee says in the lede:
Many same-sex couples in California are getting a tax break this year from the IRS, according to new requirements to report their combined income on federal tax returns.
No mention of the people who will pay more as a result of the rules.
The Lambda attorney quoted said it'd save money:
Peter Renn, a Los Angeles-based Lambda attorney, hailed the new IRS requirement as a money-saver for many same-sex couples, as well as another step to "move the ball forward" in recognizing their rights.
Yes, but if you're forced to pay higher taxes for this step, the fact that it moves the ball forward will be cold comfort.
Perhaps another example will help. Imagine Linda, who earned $11,000 in 2010 as a part-time cashier, and Jessica, who cleans hotel rooms as an independent contractor (1099) and earned $10,000. Linda has two children from a previous relationship; the father is long gone and not helping with the kids. They're domestically partnered in Washington. Any takers?